The appropriate dollar amount of insurance that you need for your home can be a subject of great confusion. There are several different types of home values, but the most common are Replacement Value, Actual Cash Value and Market Value.
Replacement Value refers to the amount of money needed to rebuild your home from the ground up if it were completely destroyed. It includes the cost of labor, materials and debris removal. Replacement Value does not include the land.
Actual Cash Value is the Replacement Value of your home minus depreciation. The older the home, the more depreciation will apply and the larger the difference will be between Replacement and Actual Cash Value.
Market Value is the amount that your home could sell for in today’s housing market. This includes such factors as the neighborhood, the availability of comparable homes in the area, and the current economic conditions. Your home sells with the land, so the lot is included in the Market Value.
Your home should be insured for its full Replacement Value. It is inappropriate to insure a home for its Actual Cash Value or Market Value. If your home is destroyed, it won’t matter how much you could have sold it for, or how much depreciation might have applied. The figure that matters is the total cost to rebuild the home, exactly as it stood. A 1000 sq ft home built in 1960 may only sell for $40,000 in today’s market, but it will cost far more than that to rebuild that home. The new home will be a 2012 home and it will have to meet today’s building codes.
Even knowing that, you may still feel that the Replacement Value of your home is too high. Maybe it is, and your agent should be willing to recalculate it for you anytime you ask. Keep in mind, though, that the Replacement Value also includes a projection of the rise in labor and material costs in the event of a natural disaster. For example: if your home burns down in a fire that only affected your home, you may be able to have it rebuilt for $X. However, if your home is damaged at the same time as many other homes (hurricanes, wildfires, etc), the demand for labor and materials rises and those items become more expensive. Anyone who was affected by the 2004 hurricanes can tell you how much contractor costs were driven up by the overwhelming demand. When thousands of people have blue tarps on their roofs, waiting for a roofer to become available, new roofs are going to be costlier. The Replacement Value of your home must account for that.
Good insurance agents know all of this and will make sure to insure your home for its full Replacement Value so that you have enough money in the event of a claim. Beware of an insurance agent willing to insure your home for less than Replacement Value (usually by ‘fudging’ the Replacement Cost Calculation so that it does not accurately reflect all the features of your home). What those agents fail to tell you is how huge of a risk you’d be taking. Per FL insurance law, the first thing a claims adjuster will do when you file a claim is to calculate the Replacement Value of your home and compare it to the coverage amount on your policy. If your home is insured for significantly less than its full Replacement Value, by law, your insurance company has the right to deny all or part of your claim. At the very least, they will reduce the claim payment by the percentage to which you are underinsured.
In effect, failure to insure your home for its full Replacement Value means that you are paying for insurance that may or may not be there for you when you need it. You should feel comfortable asking questions about the Replacement Value of your home and how it was calculated.
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